1965 (11) TMI 42 - SC - Income Tax

Whether section 35(10) authorises the Income-tax Officer to bring to tax rebate granted in assessment years commencing prior to April 1 1956? Whether distribution by the liquidator of accumulated profits in the previous years could be regarded as declaration of dividend within the meaning of section 35(10) so as to attract the applicability of the provisions enabling withdrawal of rebate and demand for tax? Held that - It is true that the definition of dividend in section 2(6A)(c) will apply only if there is nothing repugnant in the subject or context in which the expression dividend occurs in section 35(10) but there is nothing in section 35(10) which suggests that the expression dividend was to have a meaning different from the meaning assigned to it by the interpretation clause. The liquidator of the appellant-company did from time to time distribute accumulated profits and within the meaning of section 2(6A)(c) read with the provisions of the Companies Act they were distribution of interim dividends. It is true that power under section 35(10) may be exercised if accumulated profits are availed of by the company for declaring dividends in any year but since the Companies Act does not in the matter of distribution of interim dividends set up any special machinery nor impose any special condition before power in that behalf may be exercised no artificial meaning can be attached to the word declaring dividends . Distribution of accumulated profits by the liquidator together with the income-tax refund certificate in the course of voluntary winding up may therefore for the purpose of section 2(6A)(c) be regarded as declaration of dividend. Appeal dismissed.

Issues Involved:

1. Whether section 35(10) authorizes the Income-tax Officer to bring to tax rebate granted in assessment years commencing prior to April 1, 1956.
2. Whether distribution by the liquidator of accumulated profits in the previous years could be regarded as declaration of dividend within the meaning of section 35(10) so as to attract the applicability of the provisions enabling withdrawal of rebate and demand for tax.

Issue-wise Detailed Analysis:

1. Authority of Section 35(10) to Tax Rebate Granted Before April 1, 1956:

The first issue was whether section 35(10) authorizes the Income-tax Officer to bring to tax rebates granted in assessment years commencing prior to April 1, 1956. This question was addressed by referencing a recent judgment in Ahmedabad Manufacturing and Calico Printing Co. Ltd. v. S. G. Mehta, Income-tax Officer. The court held that section 35(10) applied even if the dividend was declared before April 1, 1956. The argument raised by the counsel for the company, suggesting a limitation contrary to the plain words of the statute, was rejected. It was clarified that the power to withdraw rebate was exercisable within four years from the end of the financial year in which the amount of rebate was availed of. The judgment emphasized that the statute's plain language did not support the argument that the power was only exercisable concerning rebates granted for four years before April 1956.

2. Distribution by Liquidator as Declaration of Dividend:

The second issue concerned whether the distribution by the liquidator of accumulated profits could be regarded as a declaration of dividend within the meaning of section 35(10). The court noted that sub-section (10) of section 35 was inserted by the Finance Act, 1956, which provided that if a rebate was allowed on a part of the total income for the years 1948 to 1955 and subsequently availed of for declaring dividends, the rebate would be deemed incorrect relief, and the Income-tax Officer would recompute the tax.

The argument that the distribution of accumulated profits by the liquidator is not distribution by the company was dismissed. The court explained that even after passing a special resolution for voluntary winding up, the company does not stand dissolved and retains corporate existence and powers. The liquidator acts as an agent or administrator for the company in distributing assets, including accumulated profits.

The court further addressed the contention that on winding up, the distinction between capital and accumulated profits disappears, and distributions by the liquidator are of capital, not dividends. It was noted that the rule in Burrell's case no longer applied due to the amendment of the definition of "dividend" in section 2(6A) by the Finance Act, 1956. The inclusive definition of "dividend" under section 2(6A) was intended to cover distributions made out of accumulated profits during liquidation, thereby superseding the rule in Burrell's case.

The court concluded that the distribution of accumulated profits by the liquidator could be regarded as the declaration of dividends within the meaning of section 35(10). The argument that the liquidator is not "declaring dividends" was found to be without substance, as the Companies Act did not impose any special conditions for the distribution of interim dividends. The court held that the distribution of accumulated profits by the liquidator, accompanied by the income-tax refund certificate, could be regarded as the declaration of dividends for the purposes of section 2(6A)(c).

Conclusion:

The appeal was dismissed, affirming that section 35(10) authorizes the Income-tax Officer to bring to tax rebates granted even for assessment years before April 1, 1956, and that the distribution of accumulated profits by the liquidator constitutes a declaration of dividends within the meaning of section 35(10). The appeal was dismissed with costs.

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